Relief as 'cautious' SARB keeps repo rate on hold

Economists welcomed the central bank’s decision to keep the repo rate on hold despite a number of headwinds in the global and domestic outlook, including trade fragmentation, an electricity tariff hike and the budget’s VAT hike.

The South African Reserve Bank’s monetary policy committee (MPC) kept the repo rate unchanged at 7.5%, with four members supporting a hold in rates and two favouring a cut of 25 basis points.

Announcing the decision on Thursday afternoon, the MPC noted that global economic instability and domestic uncertainties necessitated a cautious approach to monetary policy going forward. Despite this, Stats SA announced this week that annual consumer inflation remained unchanged at 3.2% in February.

Reserve Bank governor Lesetja Kganyago said the global economy was experiencing extreme uncertainty, with inflation elevated in developed economies and policy adjustments from major central banks as a result of fresh inflationary risks.

“We continue to see low inflation for goods, which is likely to be temporary. Services inflation is somewhat higher, but still below the 4.5% target midpoint. Inflation expectations are close to the midpoint. For now, inflation appears contained,” Kganyago said.

He said changes to the outlook presented the possibility of a marginally lower inflation outlook, with headline inflation at 3.6% this year and 4.5% next year, mainly due to better fuel price projections and a more benign path for administered prices as a result of lower-than-expected electricity tariffs.

“In terms of the outlook, the current forecast has more moving parts than usual, including a reweighting of the consumer price index by Stats SA and the value-added tax increase proposed in the budget.”

Tertia Jacobs, Treasury economist and fixed income specialist at Investec, said the central bank’s decision was based on the uncertainty of global dynamics as well as the high country risk premium as the budget has not been passed.

“The market will remain biased towards a rate cut as inflation has been undershooting expectations, but it’s clear that the Reserve Bank remains extremely cautious.”

Regarding the budget’s proposal to raise VAT by a percentage point over the next two years, Jacobs said parliament will release its findings soon, with potential amendments to the budget proposals to be submitted to finance minister Enoch Godongwana.

“He will review it and return his views on April 2. If there’s no agreement on changing any of the expenditure projections to offset that VAT increase, the increase will be implemented on May 1.”

Jacobs said the budget tabled by Godongwana earlier this month was not pro-growth, and bracket creep combined with the VAT increase will affect the disposable income of consumers.

With primary and secondary agricultural debt estimated at around R280bn, an increase in interest rates would have set the sector back, potentially pushing some farmers into financial distress. While unchanged rates prevent a rise in debt servicing costs, interest rates remain relatively high, continuing to place pressure on farmers managing existing debt, while the input cost squeeze continues to erode farmers’ margins

—  Desry Lesele, Nedbank Commercial Banking senior manager for client value propositions

Desry Lesele, Nedbank Commercial Banking senior manager for client value propositions in agriculture, said while a reduction in borrowing costs would have been preferable, an unchanged rate was expected considering the uncertainties.

“With primary and secondary agricultural debt estimated at around R280bn, an increase in interest rates would have set the sector back, potentially pushing some farmers into financial distress. While unchanged rates prevent a rise in debt servicing costs, interest rates remain relatively high, continuing to place pressure on farmers managing existing debt, while the input cost squeeze continues to erode farmers’ margins,” he said.

Lesele said the agriculture sector remains optimistic, supported by the Agbiz and Industrial Development Corporation’s Agribusiness Confidence Index, which increased by 11 points from the fourth quarter of 2024 to 70 in the first quarter of 2025, marking its highest level since late 2021.

“This increase in confidence reflects optimism among South African agribusinesses, driven by several key factors such as favourable weather conditions, improved export performance, enhanced port efficiency and progress in disease control.” 

Lesele said Nedbank Commercial Banking remained optimistic that the Bank may cut rates later in the year.

North-West University Business School economist Prof Raymond Parsons said the MPC awaits greater clarity around developments that informed its decision and the outlook in the months ahead.

“The MPC decision highlights the role of non-model-based judgment in policy choices, especially in the current uncertain circumstances. From the MPC statement, it is evident that inflation trends in South Africa are now basically converging around the 4.5% midpoint of the inflation target range — yet monetary policy is nonetheless still in restrictive territory.”

Parsons said there was still scope for cuts in borrowing costs later in the year. There also appears to be a minority view within the MPC that interest rates could be further reduced to support economic recovery.

Pam Golding Property group CEO Andrew Golding said the MPC’s decision not to reduce the repo rate was disappointing for mortgage holders and aspirant home buyers.

“This means the Reserve Bank repo rate remains 7.5%, while the prime lending rate stays at 11.0%. While economists were divided ahead of the MPC decision, some argued that given the sluggish state of the local economy, real [inflation-adjusted] interest rates are too high, suggesting scope for further interest rate relief.”

Golding said analysts who predicted there would not be a cut at today’s MPC meeting were generally forecasting further interest rate reductions later in the year when there is hopefully more global economic certainty — as long as inflation remains contained.